David Ross

Un américain à Paris : Episode 1

A Tale of Two Oil Analysts

David Ross est le gérant américain du fonds actions global de convictions de La Financière de l’Echiquier. Cela tombe bien : de convictions, notre homme n’en manque pas !
Exilé à Paris depuis quelques années, il porte un regard incisif sur les marchés tout en observant avec circonspection les us et coutumes étranges de son pays d’adoption…

Analysts from two firms were in town the last two days for breakfast meetings. It was very disappointing (the breakfasts, not the meetings. I ordered a pancake breakfast, and that is what I got: a pancake. And it was a tiny pancake. In the US, a pancake breakfast means three pancakes the size of bicycle wheels).

Both analysts have been in the business for over 20 years. What did they say? There is too much supply for oil to get back to $60. The 2nd half of 2018 is best guess for supply & demand balance enough to see $60 oil. This view was supported by this week’s analysis provided by the International Energy Agency, which said the global oil glut will persist into 2017, as demand growth slows more than expected, especially in China and India, and Opec keeps its taps open. The International Energy Agency stated: “This supply-demand dynamic may not change significantly in the coming months. Supply will continue to outpace demand at least through the first half of next year.”

SocGen analyst John Herrin was most bearish. He sees everyone trading at all-time highs as a multiple of cash flow and the sector should be played defensively. Stick with large integrateds with dividends (Exxon, Chevron, Total); even if they do not have the cash flow for dividends, stock buybacks, and capex, they have the balance sheets for more debt and assets available for sale to support the dividend yields, which supports the stock price.

Cowen analyst Charles Robertson was more favorable, especially on nat gas. Both analysts liked EOG, saying they are without a doubt the best operators and management team. Cowen liked the recent Yates purchase; SocGen was neutral, saying it was done to shut up the street which has been harping about their reserves (he believes the EOG reserves are of such high quality that there was much longer reserve life than indicated). Both analysts were favorable on Noble Energy: the Leviathan gas field off the coast of Israel, while facing political/regulatory issues, will prove to be a big hit.

The other comment both analysts decried was the financialization of the industry in the way that hedge funds and ETFs have come to dominate. Nat Gas equity prices are more correlated with oil prices than nat gas prices. Why? Because the Nat Gas companies are in Energy ETFs, which trade with the price of oil, so the stocks have a 90% correlation to daily oil prices but only 70% correlation to daily nat gas prices. Watching fund flows is as important as evaluating reservoirs.


David Ross, FundManager of Echiquier Global